December 04, 2006

The Montreal Exchange is going public following in the footsteps of Nymex Holdings Inc. (NYSE NMX). It is pretty ironic since, Luc Bertrand, MX chief executive, had said the exchange wasn't going to let the demands of "a small minority of shareholders" set its timetable. The Montreal Exchange trades futures and options on equities, currencies, and indices.

The fact is, the MX didn't need to raise money through an IPO. It has $53-million in cash and has paid close to $35-million in dividends this year. It is about to hike its stake in the fast-growing Boston Options Exchange to 45% from 31%. It has home-made software that can process trades in 20 milliseconds. The MX is starting an exchange to trade pollution credits. Plus, Canada is far behind other nations in the ratio of derivatives-to-stock trading. There is much growth ahead.

Few CEOs can refuse the prospects of fast money and the MX is no different. The multiple of the average exchange stock including CME, ISE, and ICE are trading at 36 times forward 2007 earnings and that makes CEOs salivate about the prospects of a big pay day.

Valuation of Montreal ExchangeAccording to the Q3 2006 report of the Montreal Exchange, it generated revenues of $19.9 million and earned $5.9 million or .68 cents per share. That implies annualized earnings of $2.72 per share. Applying the industry average P/E of 36 times forward and you arrive at a valuation of $97.92 per share or $849 million market capitalization. The Montreal Exchange has 9.3 million fully diluted shares.

Demutualizing the ExchangeLike most exchanges, the Montreal Exchange is a mutual organization owned by members. The Montreal Exchange currently has about 300 shareholders, including UBS Warburg, pension fund manager Caisse de depot et placement du Quebec and Quebec-based National Bank (TSX:NA), which all hold no more than 10 per cent in accordance with its regulations. Exchange employees own 15 per cent and businesses and individuals make up the rest.

The public listing should take place next March or April, once formal procedures have been completed, Bertrand said.

Will the Montreal Exchange Be a Good Deal? The TSX Group, which owns the Toronto Stock Exchange and TSX Venture Exchange, went public in 2002. Since then, the value of TSX shares has risen from just under $9.32 on the first day of trading on Nov. 10, 2002, to its Friday closing price of $46.79.

At that price, the TSX Group has a market value of over $3 billion. Part of the reason the MX is interested in an IPO is that the TSX - owner of the Toronto Stock Exchange and TSX Venture Exchange - is interested in offering equity options and futures after a non-competition agreement expires with the Montreal Exchange in 2009.